Asset Classes Defined
Combining various asset classes in a portfolio to achieve a higher return while lowering risk is a good strategy, but only if you know what you are investing in. Each asset class has unique characteristics that influence its price volatility and level of risk. In this month’s column, I define the major asset classes and explain what factors influence their returns and what risks they carry.
Though each asset class is not without risk, when grouped together in a portfolio, their individual characteristics offset overall investment risk and enhance long-term returns.
Stocks are ownership interests in a company. They are often called equities because shareholders own the net assets of a company, which is also known as “equity.” As partial owners, shareholders have the right to vote on corporate matters and receive dividends.
Stock prices are primarily influenced by earnings, and the market’s expectation of what future earnings will be. A variety of other factors can also affect a stock’s price, including valuation, the economic environment, industry conditions, sentiment, news headlines, and changes in the number of shares outstanding.
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